Bad Brokers Beware: FINRA Aims to Further Tighten the Screws on Ill-Behaved Brokers and the Firms That Employ Them

FINRA recently posted two regulatory notices aiming to further rein in so called “high risk brokers,” as well as the firms that choose to employ them. The first, Regulatory Notice 18-15, is aimed squarely at firms that employ brokers with a history of previous misconduct. It advises firms on (1) Identifying Individuals for Heightened Security and (2) Developing and Implementing a Heightened Supervision Plan for such individuals. The second, Regulatory Notice 18-16, seeks comment on a variety of FINRA rule amendments relating to “high-risk brokers and the firms that employ them.” We discuss the notices in further detail below.

These notices should not come as a surprise, as FINRA’s 2018 Priorities Letter stated that “a top priority for FINRA will continue to be identifying high-risk firms and individual brokers and mitigating the potential risks that they can pose to investors.” Nonetheless, the import of these regulatory notices is unmistakable; firms that seek to hire or continue to employ high-risk brokers can expect increased scrutiny from FINRA.

Regulatory Notice 18-15- Guidance for Firms Employing High-Risk Brokers

FINRA published this notice “to reiterate the supervisory obligations of member firms regarding associated persons with a history of past misconduct that may pose a risk to investors.” FINRA encouraged firms to adopt the practices set forth in the notice to “strengthen their own supervisory procedures.”

As stated above, firms need to employ a two-part test when dealing with high-risk brokers: (1) Figuring out what brokers need to be placed under heightened scrutiny and (2) Developing a “heightened supervision plan” for dealing with these high-risk brokers.

To help firms ascertain which brokers should be placed under heightened scrutiny, the notice provides a laundry list of criteria that firms should consider, including: “internal investigations; firm-imposed discipline; disciplinary actions; final, pending and settled arbitrations; past, open or settled customer complaints; terminations for cause; and other items disclosed on the person’s uniform registration forms.

Next, a firm should develop a written plan focused on addressing the specific broker’s “incident history.” Firms “should consider whether the nature of the concerns the associated person’s incident history raises involved a particular product, customer type or activity.” The notice also gave a non-exhaustive list of factors that the heightened supervision plan—at a minimum—should consider:

  1. Designating a principal with the appropriate training and experience to implement and enforce the plan.
  2. Requiring appropriate additional training for the associated person subject to the plan to address the nature of incidents resulting in the plan.
  3. Requiring the written acknowledgment of the heightened supervisory plan by the associated person subject to the plan and the designated supervisory principal.
  4. Periodically reviewing the heightened supervision plan to assess its effectiveness.

In addition to these suggested minimum requirements, FINRA also suggested that the heightened security plan could include: expediting the handling of customer complaints related to the associated person; more frequent review of the associated person’s communications, particularly with customers; and proximity of the supervisor to the associated person.
Simply put, firms choosing not to implement these guidelines will do so at their own peril, as the notice makes clear that a firm’s failure to implement these guidelines will be “closely evaluated” in determining whether the firm itself would be subject to disciplinary action.

Regulatory Notice 18-16- FINRA Requests Comment on Rule Amendments Relating to High-Risk Brokers and the Firms that Employ them

In line with its 2018 priorities letter, FINRA has proposed amending multiple rules that seek to impose additional restrictions on high-risk brokers and the firms that employ them. FINRA seeks comment on these amendments by June 29, 2018. The below chart indicates the rule being amended, as well as the substance of the amendment.

Proposed Rule Amendment Description of Amendment
Rule 9200 Series
Rule 9285 (Interim Orders While on Appeal)

A. Rule 9285(a)

  • Would allow the Hearing Panel, Extended Hearing Panel and Hearing Officer to impose conditions or restrictions on the activities of a broker as the hearing panel or officer “considers reasonably necessary for the purpose of preventing customer harm.”

B. Rule 9285(b)
Would establish an expedited review process to allow a broker that had conditions or restrictions imposed on them to file a motion with the Review Subcommittee of the NAC to modify or remove restrictions.

  • Broker would need to show the conditions are not reasonably necessary to prevent customer harm.
  • FINRA’s Department of Enforcement would have five days to oppose Respondent’s motion.

C. Rule 9285(c)

  • Requires any firm that the broker is associated with to adopt a written plan of heightened supervision if any party appeals a Hearing panel or Hearing officer decision.
  • he member firm would specifically need to “implement tailored supervisory procedures that are reasonably designed to prevent or detect a reoccurrence of the violations found.”
  • The heightened supervision plan would need to comply with Rule 3110.
Rule 9520 Series (Eligibility Proceedings) Rule 9523 (Acceptance of Member Regulation Recommendations and Supervisory Plans by Consent Pursuant to SEA Rule 19h-1

  • A member firm would need to immediately place an individual on an interim heightened supervision plan once a statutory disqualification application is filed.
  • The interim plan must be tailored to the specific individual and “must take into account the nature of the disqualification, the nature of the firm’s business, the disqualified person’s current and proposed activities at the firm, and the qualifications of the supervisor.”
Rule 8312 (FINRA Broker Check Disclosure)
  • Requiring firms to disclose their status as a “taping firm” under Rule 3170.
  • Specifically, a member firm that hires a certain percentage of registered persons from disciplined firms “is designated as a taping firm and must establish, maintain, and enforce special written procedures for supervising the telemarketing activities of all registered persons.”
  • The Disciplined Firm List is published by FINRA pursuant to Rule 3170.
NASD Rule 1010 Series (MAP Rules)
  • In general, FINRA is proposing amendments to the MAP (member application and processing) rules to impose additional obligations on member firms whose associated persons have, in the last five years, either: (1) one or more final criminal matters or (2) two or more specified risk events.
  • The amendments would permit FINRA to “potentially restrict or deny a member firm from allowing such a person to become an owner, control person, principal or registered person.”

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